As part of a massive overhaul of the regulations governing our country’s financial system, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) in July 2010. Included in this regulation was an enhancement to the U.S. Securities & Exchange Commission (“SEC”) Whistleblower Program with the hopes that through providing financial incentives (awards), individuals would be willing to provide tips to the SEC and other regulators regarding fraud. Based on the activity of the Program and the awards provided, it appears that the Program has assisted the regulators in its attempt to protect the investors by prosecuting fraudsters.
The regulations require the Commission to pay awards to certain whistleblowers that voluntarily provide original information to the SEC about violations which lead to the successful enforcement and monetary sanctions received by the government in excess of $1 million. The program specifies that, at the discretion of the Commission, the awards paid to the tipsters should fall between 10% and 30% of the amount the agency recovers. Such awards are tied to the amount recovered by the government which can be less than the amount ordered in a case.
The regulations also require that the SEC’s Office of the Whistleblower provide an annual report to Congress, detailing its annual activities. Based on that report for the fiscal year 2013, the program experienced a steady increase in activity during its second full year. The SEC received 3,238 tips in 2013, 8% more than received in 2012. Most of the tips came from within our 50 states; however, approx. 400 tips originated from individuals in other countries, mainly the United Kingdom, Canada and China. The report also disclosed that in fiscal year 2013, the SEC paid out over $14 million in awards including the following:
Approximately $150,000 was paid to an individual, the first-ever whistleblower, who also received funds in 2012 for the same case involving an unnamed multimillion dollar fraud. The penalties in that case amounted to more than $1 million, but only $150,000 was collected by the agency during 2012. As additional funds were collected by the SEC during 2013, they made additional payments to the recipient, as required. That individual has now received a total of $200,000 in award payments. As the whistleblower was awarded 30% of the sanctions, it is anticipated that as more money is collected from the defendants through a court ordered payment schedule, the tipster could receive an additional $100.000.
The second-ever whistleblower award was announced in June of 2013. This case involved a sham hedge fund and its chief executive, Andrey Hicks, and there were three whistleblowers that assisted in the investigation which ended with the closure of the fund. The tipsters were awarded 15% of the amount collected, and the first installment was made in August of 2013.
The largest whistleblower award was announced in October of 2013 for $14 million and involved Anshoo R. Sethi and his two companies which collected funds from 250 foreign investors after presenting fraudulent plans to build a hotel and conference center. The SEC determined that the whistleblower deserved 10% of the $147 million returned to the defrauded investors.
The SEC announced another award in October of 2013 for $150,000 representing 30% of the money expected to be collected. In early 2014, they announced an award for $875,000 to be split between two whistleblowers.
Additionally, the Commodity Futures Trading Commission (CFTC) announced its first-ever whistleblower award in May of 2014. The recipient was awarded approximately $240,000 for providing specific, timely and credible information regarding numerous violations of the Commodity Exchange Act.
No further details were provided regarding the whistleblower awards as the regulations protect the identity of the tipsters. It is believed that the protection of the whistleblowers is paramount to the success of the Whistleblower Program.
As acknowledged by SEC Chair Mary Jo White, the Program has generated high quality tips and persuades people to step forward and alert the SEC of wrong doings. The CFTC’s Director of the Whistleblower Program, Christopher Ehrman, dubbed the Program a “necessary enforcement tool for the agency”.
The increase in the activity of the Program since its revision in 2010 as well as the increase in the awards given to date and the comments from the regulators, it appears that the incentive awards of the Whistleblower Program are effective in exposing fraudulent conduct leading to enhanced investor protection.
If you have questions regarding the Whistleblower Program or any details presented in this article, please contact your regular WithumSmith+Brown partner.
– Donna Nevolo, CPA, Senior Manager